Does Pandora (P) Stand A Chance? I Doubt It

By: ispeculatornew
Date posted: 08.16.2011 (5:00 am) | Write a Comment  (0 Comments)

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We had discussed Pandora a few weeks ago after the company turned public and one of my biggest doubts surrounded the fact that the company had yet to turn a profit, did not expect to turn one in the near future and its revenues were honestly not that impressive. I can tell you one thing: I did not change my mind.

Musc Industry = Airline Industry?

Before I go further, I just want to clarify. I’m not talking about the actual artists, I think those live in a very different environment but one that offers as much if not more potential. Pandora does not produce original music though, it distributes music through its website, mobile apps, etc. I would consider companies like Spotify, Sirius and even Apple (through Itunes) all be part of this market.

Apple Used To Have All The Power

Even 4 or 5 years ago, as music started being consumed digitally and consumers started moving away from buying the actual physical cd’s, Apple was the master of digital music at that time. Why? Through its devices such as the Iphone and the Ipod, most consumers were choosing to buy music in the easiest way; through Itunes. Buying music from elsewhere and trying to import it to an Ipod is not that complicated in most cases but why go for a complex solution when Itunes offered such a convenient one. It was a great opportunity for Apple but a terrible one for the music industry. Why? They had no pricing power. If Apple wanted songs to be sold for $0.99, labels could either accept or not be available on iTunes which was THE store. It was ideal for Apple.

Then Came Apps

When Apple decided to make apps a big part of iTunes and of what its devices would be about, that created incredible opportunities and revenue streams but also caused Apple to lose its grip on the labels. Why? Because while it’s still convenient to buy through iTunes, there are a growing number of apps that offer similar or better deals and as players like Pandora and Sirius move to other platforms, Apple has certainly lost some of its negotiations power. It was still a great move by Apple overall even though it killed its near monopoly (that would have evaporated eventually anyway). How does this new world look like? Labels basically sell rights to selling their songs to dozens of players such as Pandora, Spotify, Amazon, Google Music, Sirius, etc. They are buying different types of rights but the end result is simple in my opinion: Power has shifted

Labels Regain (Some) Control

If you are a label negotiating for the rights to Katy Perry’s music, don’t you think that all of these players want to have those songs on their offerings? Of course. Even if you increase your price a bit, they are likely to cave in as they try to battle each other for users. As time goes by, there seem to be an increasing number of high profile players which is great for users such as myself and also great for music labels. It is not great for music distribution companies and unless there are many consolidations (unlikely at this point), it will be very difficult for a company like Pandora to truly gain momentum. In many ways, I compare it to the airline industry where passengers have power while the overcapacity of the industry has left airlines unable to generate profits for their shareholders for decades. It’s depressing when I think that Pandora could be stuck in a similar issue.

Pandora Isn’t The Average Music Company

It’s true that Pandora offers many different aspects that have made it so popular and while some others such as Spotify (unlimited music) and iTunes (convenience) also stand out, Pandora remains a unique and very interesting company. Will that help the company be profitable though? Looking at airlines around the world, I tend to think that it will not be enough no.

How Pandora Could Get Around This

If Pandora was able to transform itself into something more than a music service, it could potentially find a way out but I’m not even sure that would be a good idea or that it could work. I would certainly not consider it likely that Pandora could pull something like this off.

While I am not trading Pandora right away, I am certainly leaning towards shorting the stock following this analysis

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